8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 1/40
COST MANAGEMENT
Guan ▪ Hansen ▪ Mowen
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.Cengage Learning and South-Western are trademarks used herein under license. 1
Quality and Environmental
Cost Management
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 2/40
2
Study Objectives
1. Define quality, describe the four types of qualitycosts, discuss the approaches used for qualitycost measurement, and prepare a quality costreport.
2. Explain why quality cost information is neededand how it is used.
3. Describe and prepare three different types of
quality performance reports.4. Explain how environmental costs can be
measured and reduced.
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 3/40
3
Costs of Quality
• Quality-linked activities
– Activities performed because poor quality mayor does exist
– Control activities
• performed by an organization
• to prevent or detect poor quality
– Failure activities• Performed by an organization or its customers
• In response to poor quality
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 4/40
4
• Categories of quality costs
– Prevention costs: incurred to prevent poor quality inproduct or services from being produced
– Appraisal costs: Incurred to determine whetherproducts and services are conforming• Product acceptance: sample finished goods
• Process acceptance: sample goods while in process
– Internal failure costs: incurred because products orservices do not conform; discovered prior to delivery
– External failure costs: incurred because products orservices do not conform; discovered after delivery
Costs of Quality
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 5/40
5
Costs of Quality
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 6/40
6
Costs of Quality
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 7/40
7
Costs of Quality
• Quality cost
– Observable
• Available from the accounting records
– Hidden
• Opportunity costs resulting from poor quality
• Estimating hidden quality costs
– The multiplier method
– The market research method
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 8/40
8
Assumes that the total failure cost is simply some multiple ofmeasured failure costs:
Costs of Quality
Multiplier Method
If k = 4, and the measured external failure costs are $3million, then the actual external failure costs areestimated to be $12 million.
Total external Measured external=failure cost failure cost
k
where k is the multiplier effect
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 9/40
9
Costs of Quality
Uses formal market research methods to assess the effect ofpoor quality on sales and market share.
Market research results can be used to p rojectfutu re prof i t losses attr ibutable to poor qual ity.
Market Research Method
Customer surveys and interviews with members of acompany’s sales force can provide significant insights into the
magnitude of a company’s hidden costs.
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 10/40
10
a Actual sales of$5,000,000.
Costs of Quality
b $1,000,000 ÷ $5,000,000= 20%.
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 11/40
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 12/40
12
Quality Cost Information andDecision Making
Strategic Pricing
Revenues (1,000,000 @ $20) 20,000,000$ Quality costs (estimated):
Cost of goods sold (15,000,000) Inspection - materials 200,000$
Operating expenses (3,000,000) Scrap 800,000
Product-line income 2,000,000$ Rejects 500,000
Rework 400,000
Product inspection 300,000
Warranty work 1,000,000
Total Estimate 3,200,000$
Product-line Income Low-Level Instrument Group
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 13/40
13
New Product Analysis, Project #675
Projected sales potential: 44,000 unitsProduction capacity: 45,000 unitsUnit selling price: $60
Quality Cost Information andDecision Making
Cost-Volume-Profit Analysis and Strategic Decisions
Break-even: 50,000 unitsDecision: Reject (breakeven
exceeds capacity and potential)
Unit variable costs: $40Fixed costs:
Product development $ 500,000Manufacturing 200,000Selling 300,000
Total $1,000,000
Includes $5 qualitycosts
Includes $100,000quality costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 14/40
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 15/40
15
Quality Cost Information andDecision Making
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 16/40
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 17/40
17
Controlling Quality Costs
Zero -defect standards
• Reflects a philosophy of total quality control
• Calls for products and services to be producedand delivered that meet the targeted value
• Implies the elimination of failure costs
Total Quality Approach
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 18/40
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 19/40
19
Controlling Quality Costs
1. In ter im Standard Repo rt : Progress withrespect to a current-period standard or goal
2. Mu lt ip le-Per iod Trend Repor t: The progresstrend since the inception of the quality-improvement program
3. Long-Range Report: Progress with respect tothe long-range standard or goal
Quality Performance Reports
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 20/40
20
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 21/40
21
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 22/40
22
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 23/40
23
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 24/40
24
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 25/40
25
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 26/40
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 27/40
27
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 28/40
28
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 29/40
29
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 30/40
30
Controlling Quality Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 31/40
31
Defining, Measuring, andControlling Environmental Costs
• Environmental costs: costs that are incurredbecause poor environmental quality exists ormay exist
• Damage
– Direct degradation of the environment – Indirect degradation (unnecessary usage)
• Categories – prevention costs
– detection costs – internal failure costs – external failure costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 32/40
32
Defining, Measuring, andControlling Environmental Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 33/40
33
Defining, Measuring, andControlling Environmental Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 34/40
34
Defining, Measuring, andControlling Environmental Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 35/40
35
Defining, Measuring, andControlling Environmental Costs
continued
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 36/40
36
Defining, Measuring, andControlling Environmental Costs
Note: “S” = societal costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 37/40
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 38/40
38
Defining, Measuring, andControlling Environmental Costs
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 39/40
8/10/2019 Ch14 Guan Cm Aise Ppt
http://slidepdf.com/reader/full/ch14-guan-cm-aise-ppt 40/40
COST MANAGEMENT
Guan ▪ Hansen ▪ Mowen
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
40
End Chapter 14